Considering contempt of court—Power and others v Hodges and others

How can practitioners help their clients avoid contempt of court? Gavin McLeod, barrister at St Philips Chambers, advises that it is an element of the lawyer’s duty to reinforce in the client’s mind the realities of orders, the obligation to comply, and the fact that penal notices are not included to encourage compliance but to demand it.

Original news

Power and others v Hodges and others [2015] EWHC 2931 (Ch), [2015] All ER (D) 215 (Oct)

The liquidators of a company applied to the Chancery Division to commit the company’s directors for contempt of court in failing to comply with a disclosure order. The court only imposed fines on two out of the four directors because the funding and structure of the disclosure exercise had been in the hands of the other two directors. The remaining two directors, who had agreed to fund the disclosure exercise, were sentenced to imprisonment on a suspended basis.

Briefly, what was the background to this application?

Power was an application by liquidators for the committal to prison of four former directors for contempt. The applicants asserted that the respondents were guilty of contempt in failures to comply with what was termed as the ‘disclosure order’. The essential background was that the applicants had issued proceedings asserting breach of fiduciary duty and/or misfeasance, in that it was said that during the company’s insolvency the respondents had transferred and disposed of company assets for illusory consideration etc. Freezing orders were obtained, along with an order that the respondents disclose various details—eg usernames and passwords for email accounts—so as to enable the applicants to see what communications had passed in their personal correspondence concerning the company. Continuation of this disclosure requirement was opposed on privacy and privilege grounds. Instead, the respondents proposed their own solution whereby an independent expert would undertake the necessary searches of personal communications systems/devices and would report via affidavit. The essentials of this scheme were then agreed between the parties and the disclosure order reflecting them was made.

After the deadline for compliance with the disclosure order, negotiations were entered into for a revised order, which was also made by consent. Yet this too was breached. Finally, the required disclosure was forthcoming some four months or so after the initial deadline.

The first respondent immediately admitted the non-compliance, but stated that he had unintentionally breached—he had not been able to sell a tenanted property in time to raise the capital to fund the expert. The second respondent’s explanation proceeded along similar lines. Meanwhile, the third and fourth respondents initially asserted that they were not culpable in that the other respondents, as the then represented parties, had taken the responsibility for compliance through their solicitors.

What were the legal issues that the judge had to decide in this application?

The applicants’ counsel made clear that if the question of contempt remained live, he would seek to cross-examine. The respondents were also warned of the possibility of adverse inferences being drawn if they declined to submit to such questioning. In the circumstances, they each decided to admit the contempt. It therefore followed that the court was obliged to consider the appropriate sentences having regard to the authorities, such as JSC BTA Bank v Solodchenko (No 2) [2011] EWCA Civ 1241, [2011] All ER (D) 56 (Nov) and JSC BTA Bank v Ablyazov [2011] EWCA Civ 1386, [2012] 2 All ER 575.

What were the main legal arguments put forward?

The applicants contended that the breaches were serious—with, in the end, two orders having been breached. The situation was worsened in that the unmet timetable had been proposed by the first and second respondents themselves—thus, at best, they had shown themselves ‘indifferent’. Indeed, it was suggested that the evidence was consistent with a ‘conscious disregard for the timetable’ and that the delays were actively prejudicial to the applicants' progress of the case (para [27]).

By way of mitigation, the counsel for the first respondent referred to the damage done to his client’s well-being by the collapse of the company and all that followed. It was said that he had essentially left it to his then solicitors to progress matters. The contempt had not been wilful. It was noted that there had been the necessary disclosure, albeit latterly, and to that extent the contempt had been purged. By way of particular observation, it was suggested that there was no need for the punishment to serve as an example to the wider business community (para [31]).

Such submissions were adopted, with necessary modification, by the unrepresented parties. Unhelpfully, the second respondent advanced mitigation to the effect that he had allowed his affairs in another business to overtake things, such that he did not realise the passage of time for compliance (para [37]).

What did the judge decide, and why?

Judge Barker QC commented on the nature of committal as a measure of last resort to ensure that justice is done and that the rule of law is maintained, with underlying motives of the imposition of punishment, the effecting of deterrence and the coercion of as yet unpurged contemnors (paras [56–60]). Having done so, he accepted that the third and fourth respondents were of lesser culpability. In particular, the fourth respondent had distinguished himself by actively raising with the applicants’ solicitors the possibility of seeking to amend the disclosure order once it had become apparent that timely compliance was unrealisable. In both cases, fines were imposed.

As for the other two, however, the court was satisfied that imprisonment was necessary and justified. It was noted that they had been the represented parties and had put forward terms for the disclosure order that would never likely be met. Indeed, they had ‘no realistic basis’ for thinking otherwise. The idea that their breaches were unintentional or mere clumsiness was ‘utterly untenable and fanciful’. Their deliberate conduct was instead representative of a ‘conscious disregard for the court’s order and the rule of law’ (para [82]) and a ‘contumelious’ attitude (para [86]). The failure to meet the second order and the degree of prejudice to the applicants were significant aggravating factors.

Having regard to the mitigation and the fact that the contempt had been purged, four months’ imprisonment was imposed in the first respondent’s case and six months’ imprisonment in the second respondent’s case. (Such terms would be commuted by means of section 258(2) of the Criminal Justice Act 2003, which provides for automatic and unconditional release of contemnors after service of half of their sentences). The second respondent’s purported mitigation by reference to his busyness as regards other affairs was seen to worsen his case. Meanwhile, the submission that there was no need to send an exemplary message was firmly rejected.

The court ordered, however, that the terms should be suspended. This was for two reasons:

  • incarceration would inhibit the progress of the litigation still further and to that extent would prejudice the applicants
  • it was appropriate to suspend to emphasise the deterrent element of a custodial penalty, which will hang over the respondents for the 18-month operational period

The conditions of suspension were that there should be no further breaches of orders endorsed by penal notices in the instant or related proceedings and that there should be no breach of the respondents’ duties as former directors under section 235(2) of the Insolvency Act 1986 (ie in relation to the provision of information to, or the attendance upon, the applicants).

What practical lessons can those advising take away from the case?

It is both common sense and an obvious element of the lawyer’s duty to reinforce in the client’s mind the realities of orders, the obligation to comply, and the fact that penal notices are not included to encourage compliance but to demand it (such demand being backed by punitive powers). Advisers will note the significant mitigation, which was available to the fourth respondent from his attempts to confront the impending deadline, albeit that they were ineffectual. This no doubt reinforces the imperative need to establish frankly with one’s client whether compliance is likely to prove possible (with a view to seeking realistic directions or orders in the first place) or otherwise the urgent guidance from the court when time is running out but the penal notice continues to hang in the air.

Gavin McLeod practises in commercial and regulatory law. His work covers a broad spectrum of contractual and property disputes at all stages of litigation, often involving cases with insolvency implications. He also appears in substantive insolvency matters, especially winding-up and bankruptcy petitions.

Interviewed by Kate Beaumont.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

Further Reading

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A summary procedure under section 212 of the Insolvency Act 1986 and the process for bringing a misfeasance claim

Basic principles—the delivery-up of information and property to the insolvency office-holder

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First published on LexisPSL Restructuring and Insolvency

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